BRF SA (BRFS) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the BRF conference call.

This conference is being -- it is -- this is where this presentation is available in the webcast platform.

(Operator Instructions)

Forward-looking statements within this conference call regarding the company's business outlook, projections and results and the company's growth potential are purely assumptions based on management expectations regarding the company's future.

These expectations are highly dependent on market changes and overall economic performance of the country and the sector in international markets and are subject to changes, we would like to remind you that this conference call is being recorded.

This conference call will be presented by Mr. Lorival Luz, Global Chief Executive Officer; Mr. Carlos Moura, Chief Financial and Investor Relations Officer; Mr. Sidney Manzaro, Vice President Market Brazil and Mr. Patrício Rohner, Vice President from the International Market.

Now we will give the floor to Mr. Lorival Luz that will initiate the conference.

Well, first and foremost, good morning to everyone.

Thank you for participating in our conference call and earnings conference recall.

I would also like to inform you that in addition to the President, we have other people that will make presentations, all the other VPs are here with us, and they will be available to answer your questions.

Well, initially, I would like to comment and going to Page #4, that would be the first data of our company, and I would like to talk about the net revenue of the company, that is BRL 8.5 billion.

And first and foremost, we -- during the second consecutive quarter, we had gross margins at the level of 25%.

Now this also demonstrates a trend of raising our margins, and this is something that we have seen since the end of last year, and we have seen this, this year, and this has stabilized during the last 2 quarters.

I'm talking about the second and the third quarter.

And we're talking about a level of 25%.

Now when we talk about the EBITDA, the adjusted EBITDA of the company is BRL 1.6 billion.

This is a 19% margin, but we would like to highlight that we had throughout this quarter, as you saw in the release, we had a tax-related event regarding the ICMS based on the fiscal things and excluding this tax-related events, we're talking about an adjustment EBITDA of BRL 1.142 million and an EBITDA margin that is adjusted of 13.5%.

And I would like to strengthen that the company during the second quarter of last year, they had a EBITDA margin of around 7%, and this went up to 10% during the first quarter.

And now during the second quarter, and third quarter were -- we had a 14%, now in -- specifically in this quarter, we're 13.5% of EBITDA margin that demonstrate the evolution of the actions that have been carried out in the company and the company's current level because we're increasing our EBITDA margin.

Now moreover, during this quarter, just to strengthening this fact, regarding 140 -- BRL 1.142 million during this quarter, we had an additional BRL 111 million in provisions.

These provisions were carried out in the corporate segment.

Here, we include provisions of public civil actions, demobilizations and also an adjustment of Lucas do Rio Verde.

And also regarding the housing program, we have BRL 19 million.

And we've also had provisions of closing our labor lawsuits that represented 70 -- BRL 57 million within this BRL 1.142 million.

We have BRL 168 million that correspond to provisions.

Now throughout the year, we totaled BRL 3.9 billion.

We would like to remind you that like in the third and the second quarter, we also adjusted the fiscal things base.

And even though we -- if we exclude this figure, we will total BRL 3 billion.

Another very important factor that we would like to highlight, it would be the consistency of the profitability of the company throughout this company of BRL 446 million and accumulated BRL 523 million.

Now we also had losses in the year of 2018.

And what is very important is free cash generation of the company, a robust generation of BRL 1.4 billion during the third quarter, totaling BRL 3 billion in 2019.

We would also like to remind you that within this BRL 3 billion, we include the D&A investment plan that was announced last year and it was executed in the beginning of this quarter.

But this strengthens our commitment of financial discipline with operational cash generation that is very robust, and everything is being used in order to reduce our debt and to deleverage the company.

This is one of our priorities.

Now on the following page, Page #5.

Our cash position that is very solid and robust of BRL 7.7 billion.

A net debt reduction, BRL 13.8 billion and an average maturity of 4.4 years.

And now our financial situation is better than what it was last year.

Now regarding our leverage, we had a guidance of 3.15x at the end of this year, and we have updated to 2.75x by the end of this year, and we are reporting currently 2.90x at the end of this quarter.

And here, we're considering the effect of the IFRS 16 and this would be 3.21x, but what I would like to highlight here is the trajectory.

One -- exactly 1 year ago during the third quarter of 2018, we reported an EBITDA of 6.74x.

And now we are at a level of 3x, and we are pursuing to drop this leverage to around 2x, as we mentioned in our strategic planning last year.

This was during BRF day last year.

So we are going toward our priorities and within the 2.75x.

We still have 3 months till the end of the year.

There -- and the exchange rate is volatile.

And as we have 57% of our debt in foreign currency, we may see volatility regarding this.

And this can affect our balance sheet, but not the operations.

This is why this leverage is of 2.75x.

Now speaking about events, possibilities and opportunities that we have ahead of us and the prospects for 2020.

Throughout this quarter and very recently, we have 3 plants for the Chinese market here that are licensed.

Here, we have Lucas do Rio Verde that is for pork and poultry, and they were licensed by the end of September.

So we still do not see any effects in the results of the third quarter, but with a possibility or great potential to export 40% of our volume and 40% of exported in porks and 20% in poultry.

And during this last week, we also licensed our plant of Santa Catarina of Campos Novos to export offals for China as well.

And with a potential of at least 5,000 tons a year of these products that demonstrates a great opportunity.

The company has worked together with -- the Ministry of Agriculture has worked together with the Chinese market in order to license these plants, in order to supply this market.

And we have observed this throughout these months, and this has generated a greater volume potential and a greater opportunity for BRF.

And then on Page #6.

During the last week, we signed an MOU with SAGIA in Saudi Arabia, with an investment of around $120 million in order to build a plant to supply the Saudi market, but this can also be an export hub for the region.

Therefore, this is a plan that will have an installed capacity of 50,000 tons a year, that will produce industrialized products, breaded, marinated products, hamburgers that are -- the objective of the company to grow more and more in the products of greater added value and also trying to reduce the result volatility and greater stabilization of margins and results.

Saudi Arabia, as all of you're aware, is a market that is a priority in market like all the Halal market for BRF.

We are -- we have been present in this market for over 40 years.

We have a leading process.

We have a very strong brand.

We already have an excellent distribution in this region, mainly in Saudi Arabia, and we want to participate more and more of this moment, and the 2030 view of this country.

I would also like to highlight and to clarify that we -- there are no negotiations or no counterparts with SAGIA or with the Saudi government, what we do have is a strategic plan of BRF according.

It has been mentioned beforehand of investing and to continue growing and to maintain our leading position in this market.

Therefore, there is no type of counterpart as there is no obligation that -- in terms of raw material that the raw material for this plant should be come from the local market, what we do -- what we are, we are committed with the final quality of our product and all the raw material that is necessary, that will be used in this plant, should need all the quality requirements that reassure the quality of our commitment, that is our product, that this is our greatest commitment.

And we have good quality raw material that is locally competitive.

We will buy locally.

If not, we will have to balance this with the import of the products that we have.

And with these products, we can reassure the quality of the products that come from Brazil.

So this is part of our alignment and our strategic alignment.

Now going to our next page.

And we will talk about our view in terms of grains, that's something that strongly impacts our cost.

That is the cost of protein, and this is the message that I would like to convey.

Now unlike last year, where we had a very strong spike in terms of cost of soybean and corn, what we can see here, yes, there is a volatile situation because of trade wars, because of delays of the crops in the U.S., but this is an intrinsic volatility within a certain level.

And this is something that we have observed in 2019.

We have seen greater stability in this level.

And with this volatility, there can be a slight increase for the beginning of 2020.

The company is dealing with this not as a financial position, but yes, as an absolutely relative input, and we do not use this as a financial instrument in order to add risk to the company.

When we observe protein's prices, we see that there is a higher volatility, especially in swines, and I will talk about that in the next slide.

But in a much higher level in relation to 2018 and beginning of this year.

Therefore, there is a certain level of volatility and instability in proteins price but in a much healthier level than the one we had last year, and that can be seen in the company's results, showing an improvement in our margins, especially gross margins.

Therefore, our scenario as to costs to proteins that is much more positive than what we had during the first half of this year.

And especially during last year.

And we forecast that this will be kept throughout the next quarters.

And that will even increase positively.

And why is that?

Especially, if we consider our next, Slide #8, there is still a ASF impact or the African Swine Fever.

On the left.

So we see relevant information where we have information from the Chinese agricultural ministry, it's stating a reduction of swine matrix in -- amounting 45% to 50%.

So China is responsible to 50% of the worldwide production amount in 115, 120 tons.

That represents a very significant and relevant impact.

And the main curve, let me highlight those breeders.

Such a drop is constant, what is that?

There is still -- it's largely in the females, the more -- it was allot to the females animals, the longer it will be the recovery time and the crop reposition.

And more we will delay the FACTIVE effect of protein shortage because there is a continuous slaughtering.

And their offer is a still at the local market, and even if we anticipate that the curve on the right conveys that local impact is to prices.

That yellow curve of the breeders, they will stabilize, and once they reestablish the crop, there will be a shortage of products for consumption.

Here, we have the piglets and the sow herd and live hog, getting to a higher impact offer demands, when will that happen.

We thought that could happen during the second quarter, third or -- quarter, but it's still, that will take place, it just once the African swine fever is controlled and hold.

So every month, or every quarter, this scenario or this data gets closer.

And due to the number of 50% reduction, there is a likelihood to see that happening during the first half of 2020, and that will be increased, leading to a higher volatility and significant impact in regards in to prices.

Next slide, please.

Let me just emphasize that later on, where we will address future perspectives, our BRF day, which will be carried out next Tuesday, November 12, in S?o Paulo and November 14 BRF day in New York.

So you are all invited to participate at BRF Day.

And with that, now I'd like to introduce our CFO, Mr. Carlos Moura, who has just joined the company.

And now thanks to Carlos Moura.

We have a complete VP team.

He now has joined other Vice Presidents, who have been working together for 1 year.

So this team has been together for 1 year, and Carlos just came to reinforce and close this team.

Now you have the floor.

Thank you.

Thank you, Lorival, and good morning to all of you.

It's a great honor.

I'm very glad to be part of this team under Lorival's reliability.

We have a very united team, thanks to solid and sustainable results.

And if we -- and we have positive future perspectives.

Figures will be commented by Sidney and Patrício, so I will address our net revenue, which has increased 8% in comparison to the same time last year.

That was due to the cost of a stable, so the product in comparison to last year.

A gross profit of 28.4% (sic) [24.8%], BRL 2 billion.

This stronger development of our gross profit gives us an adjusted EBITDA and margin of 178%.

So that represents a very important leap, and now we have BRL 1.172 million in the comparable base, once that we are highlighting the effect of BRL 467 million, excluding ICMS in the calculation base as to Sadia considering the harvest of this revenue as a consequence of Sadia's revenue, we have a positive effect of our financial results of BRL 1,500 million, which collaborated for the second half of the year.

We have emphasizing our expenditures, matrix management where we reached the organized set of actions to keep our expenditures under control.

Slide #12 now.

We see a improvement operational performance going from 17% to 18% last year.

Progressing to 28, reaching a new level in the next 2 semester.

In comparison to the past 9 months, our absolute gross margin, grows 10.3% year-after-year.

Adjusted EBITDA also tells us that we start from a level of 7% or 8% moving to 10%.

And now we are around 14%, as Lorival just mentioned.

Once we are comparing that to the exclusion of piece PIS/COFINS over the ICMS calculation base, same period last year.

And this year, the leap or the growth is of almost 97% year after year.

Next Slide 13, wanted to highlight on quarter -- the 3 quarter.

We had a growth of our net profile, going down from BRL 16.32 million to BRL 13.8 billion (sic) [BRL 13.8 million] in the third quarter of 2019.

Such a drop vector of this BRL 2 million of the net profit takes place due to operating cash flow.

In our investment cash flow, there is a CapEx flow chart, which is very structured by the company and the company is kicking its pace of investment capital, especially biological assets in relation to our market efficiency, Industry 4.0, which is a new industry.

Where we see new actions in our industrial complexes, IT support.

We have to mention the implementation of the integrated business planning, which will allow an optimization of our integrated planning process.

And cash flow from investments due to our debts and also the currency exchange that we face at that same period, taking our check in currency to 4.16.

And our financial cycle as well, has been highly optimized in all its components: clients; suppliers; inventories.

I mean the company has been managing the company in a very coherent way, especially working in revising processes and in sustain all practices throughout to the following months.

Slide 14, next.

I'd like to highlight and detail leverage and debt profile.

All the chart on the left, we have a financial leverage already addressed here before, but let me highlight that with the IFRS 16, we will have a leverage of 3.21x the profile of our gross debt on the right chart of BRL 21.5 billion, amounting 58% addressing international currency and 22% in -- 42%, sorry, in BRL.

The net debt below, we can see a clear evolution of 2 components.

We went from 3.2 to 4.2 years.

And our cash profile associated to debt maturity, average maturity, we had a strong demands in -- for 2030.

The repurchase of bundles with due time between 2020 and 2024, and also a domestic markets and that's of [BRL 1,000,600 million].

And the previous amortization of lines amount to BRL 700 million in the domestic market.

All of that allowed us to reduce our debt associated to an average extension time to national and international currencies.

With that, I'd like now to give the floor to Sidney, who will address Brazil Markets.

Thank you.

Thank you, Carlos.

It's wonderful to have you with us here today.

And here I am to talk about the Brazil segment.

Good morning.

Let me share with you our positive results in the Brazil segment in line -- aligned to the strategic planning, that's exactly what we have been talking about in our past meetings, our net revenue, up to 6.3%.

Gross margin reaching a level closer to the ideal of 24.6%, reflecting to a significant growth, adjusted EBITDA of BRL 541 million with 12.3% margin.

There is also a continued focus on leverages (sic) [innovation] that will support us in the future.

Our continuous growth throughout our new pipeline and new projects, which will build up our future results as well as our -- getting back to our investments, brands recognized in the Top of Mind awards such as the Sadia's campaign, Qualy and Deline, all of them awarded and recognized by the market, thanks to the awards that we got.

Now Slide 17.

Results, they become more evident and clear once we see a consistent growth of margins, and there is a rising profitability in the past 3 terms with a level of 24.6%.

Adjusted year-to-date, we see a significant growth from 19.9% last year.

Moving to 23.3% this year.

That reflects a constant growth and a recovery of our bottom line EBITDA in the Brazil markets amounted 12.3% in the last period.

And now Page 18, and here is where I would like to elaborate a little bit more in the explanation.

We can see that in volume, we still see a drop vis-?-vis last year.

This is a reflection of our profitability policy.

And because we are adapting our change to the new reality of the inventories, therefore, pressure for liquidation has ended.

Now when we see, for example, this market, we can also observe that the growth or the drop is driven by In Natura products, where we concentrate our great efforts to regulate our change in -- when we see processed products, we can see that there is slight drop vis-?-vis last year of 1.1%.

And when we analyze the past period, and we compare it to the last quarter, we grew almost 10%.

This has generated an ever-growing revenue of 6% when we compare it to the last period that was 7%.

And therefore, our margin is growing in a consistent fashion.

And also, this is reflected on our EBITDA.

Now this also impacts our market share, our market share presents a drop of 1.3, and it is also important to understand what has happened here, this is different between categories that we work with because it's reflected in a different way.

So there are categories where the past effect of liquidation had a greater impact, and this suffers more.

Now the segments where there were no major impacts, we suffer less.

So we can clearly see that within the cold segment, we grew 0.6% vis-?-vis the last year.

Cold Cuts here is where we have a market share of 50%.

Other segments that we also follow in a positive way, would be Margarines and reaching a level and a significant level when we compare it to our history, would be 54.2%, and this is a growth of 1.3 percentage points.

And where we have the greatest impact regarding the balanced policy of the chain and the recovery of our margins because of the transfer of price.

We have a negative impact, especially when we talk about Cold Cuts, where we dropped 2.7% where we regulated our inventory.

And now in -- with more consistent margins, we are already recovering our growth.

And the same thing with frozen product, and frozen products were the impact.

The self-service operation is impacting our prices, but I believe we already have the retail driving Cold and Margarines.

Now when we see the scenario, we are highly optimistic.

We are also consistent regarding our strategy, and we will continue having more gains.

Because of the better execution and operational efficiency, we will work a lot with innovation, improving our services, investing in our brands, so that we can have -- so we can provide our consumers the desired brands.

I will give the floor to Patrício, so he can talk about the positive results in the international market.

Thank you very much, Sidney.

Good morning.

Now let's see the international market.

We are on Page 20.

Here, we can see an increase in volume, practically at the same level of last year, but a slight drop vis-?-vis the last quarter, especially because of Turkey that ended their exports to Iraq, and this impacted a volume that represented more or less 30% of our exports.

This is an important volume.

Nonetheless, it was managed by other markets.

Now when we go to our revenue, our revenue was 4.8% lower than the last period.

When we see the gross profit, it was almost 8%.

Now when we see the EBITDA, it was only 2% less.

And I would like to explain this effect in the upcoming slides.

So when we analyze things for geography, Halal is very important, it is 59%.

And non-Halal represents 41%.

And if we analyze per protein, 79% would be poultry, 8% swine and 13% would be other products, especially industrialized products.

When we analyze this category per product, here, we have poultry whole, 37%, and most of them have the Banvit and the Sadia brand, the poultry parts represent 41%, swine represent 9% and FPP, 12% that are the main focus of our moment that would be for whole poultry, then we go poultry parts, industrializing swine and FPP.

Here, we have a picture of the Halal.

Here you can see the important percentage of processes.

Years ago, we had 4%.

Now we have 14% and poultry is at 86%, and I believe that poultry parts have been cannibalized.

And this has been cannibalized when we compare it to a whole poultry.

When we see the net revenue, this is what was mostly impacted.

Here, you can see a drop of 11.6% vis-?-vis the last period.

And what happened with the EBITDA?

Well, it dropped, but not so much because of the control of the expenses and the good management of the prices of the volume per channels.

And this is something that we have done in the Gulf.

In order to improve the situation that presented in Turkey, we would like to remind you that Turkey represents 30% of the total volume that is sent to Iraq and Iraq was closed, almost totally, only the northern part of Iraq was open, that was highly saturated because of the exports of the Turkish producers.

So this exerted pressure on the Turkish market to sell products that are not ideal for the Turkish market.

These are smaller poultries and that we're frozen in.

They have -- and this was to sell poultry that buys fresh products.

So this has impacted a lot.

So Turkey is the main Halal market, nonetheless Saudi Arabia together with the Gulf countries, especially -- totally aligned with the former period.

The only thing that this generated a little bit less cash because of the volume.

Now when we go to the international markets, the volume at the end there was better, especially when we compare with the mix.

Evolution process products are growing when we see swines.

Here, we have 18% in comparison to 70% poultry, 70%.

The revenue grew 5%.

But as the other international markets represent 40% of the total, they weren't able to generate all the volume and the revenue that Halal had lost because of Turkish -- Turkey.

When we see the EBITDA, we can see an expressive improvement in the total period from 20% to 23% of EBITDA that was the growth of 20%.

So when we compare year-on-year, the sales price was 32% higher, they were higher shipped volumes.

This was 5%.

And the new plants haven't been opened yet, and there is a 23% margin.

That has been the best margin in the past years within all of these market groups.

So I would like to give the floor, once again, to Lorival.

So thank you very much, Patrício.

Just to bring this presentation to an end, and before we start our Q&A session, I would like to say that strategy outlined by the company has presented very positive results.

Our company now is in a new level when we see the margins, when we see its cash generation, always reminding you of our commitment.

This is a commitment with the profitability and sustainable and continuous growth, always with our eyes on the long term and the trajectory of the company, we are operating in a very efficient fashion, with our inventories at very low level, something that allows us to have a proper management of our exports, of our sales in the local markets, always with the objective of adequating ourselves at the long term.

Now the recovery and the results are appearing as it was planned.

And as I can see, things are happening in an accelerated fashion, faster than what we had last year.

Though we've seen the net result of the cash, the deleveraging of the company.

Our cash generation is a result of all of this.

And our prospects are very strong because of all the structural effort that has been carried out and the impact that we will have with the new licenses within the last quarter that will generate new results as of the upcoming quarters.

Now our leverage guide and deleveraging guidance perhaps may be affected by certain volatility in the exchange.

What is important is the trajectory of the company's management, and it is to take the company to 1.52x and to recover the growth, not only in the foreign market, but in the local market, with innovation, the launching of products and also the expansion of our plants.

This is just a summary and a conclusion of the first part of our presentation.

With no further ado, we will open to our Q&A session.

(Operator Instructions) Our first question comes from Isabella Simonato, Bank of America.

I have 2 questions, local questions.

Well, one would be, when we see processed products, what draws our attention here would be the improvement of sequential volume when we compare the second and the third quarter.

Although the average price was maintained, although the price of the poultry was lower, if you can give us an idea of how you see the dynamics especially in these segments.

Do you believe -- how would your consumer responding to the price?

And my second question would be connected to the local poultry production.

We see the data that has been accelerated.

So how do you see supply and demand mainly because of this uncertainty of when the foreign market is going to accelerate in a more consistent fashion?

So I don't know if you can elaborate and tell us what do you see on the side of production?

Well, thank you very much, Isabelle.

I'm going to briefly answer your second question, and then I will give the floor to Sidney.

Once again, here, what we can observe here would be a context in a general way and the prospect.

Now when you talk about housing, especially for 2020, now the data exists and you can see it.

But yes, there will be a need for more proteins.

We have already seen shipments towards China of chicken breasts, something that -- well, this market really didn't buy a lot of chicken breast.

So this demonstrates that there is a greater demand.

And so what we are observing.

And yes, this is a new opportunity.

As you can see, the chicken breast market was mainly for Europe so the effects of the protein need is making China and other countries to import these products.

So I do see this increase.

I believe that the production and the results will be seen throughout 2020.

And I believe here that during this period, we will have a demand for these type of products.

So yes, as I already said, perhaps there will be some type of price volatility, we recently saw In Natura.

But this is a short-term volatility with a high trend.

And as I said, we did our homework, and we can properly manage these facts to see when is the best moment to sell because we have a low inventory.

Now the long-term trajectory.

Perhaps during a certain month, we will have an impact in volume.

But what we see is that there is a positive perspective in the midterm.

And this is where the company wants to find its profitability.

I will give the floor to Sidney now.

Good morning, and thank you for your question.

As to In Natura or to poultry, as you have asked, differently from our market forecast.

Third quarter showed in the poultry market in Brazil, a decrease in prices, differently from what the market forecast agencies had said.

And that is still a vulnerable market considering that the export flow not been quite regulated as to some new actions that are taking place systematically.

And as this is pulverized the markets with more players, there is a certain change oscillation in prices.

Being responsible for a poultry prices during the third quarter, lower than what we were expecting in terms of higher prices.

The idea was to keep our prices.

And this is the reason why we had a drop in the volume as that was a situation.

And thanks to a higher export flow prices would recover, they would get back to normal.

And this is exactly what is happening lately.

With the pressure of some other prices as swine, bovine and now the recovery of poultry prices are going back to the traditional levels and market level prices.

So there was a poultry price drop in the Brazilian market in a certain specific time.

And that is no longer the problem that will be recovered and with -- it will go back to the previous level in few months.

So we had some price problems.

We suffered a little bit, but that does not change our future demand scenario.

Our next question is from Lucas Ferreira, Banco JPMorgan.

About processed meat food.

There was a price reposition in the beginning of the year.

The swine exports, they are now much more consistent in terms of volume and prices in comparison to poultry.

Do you see room for a new price spike?

If so, if yes, in which categories?

And if not, because consumers are not still able to absorb or to capture such an increase.

Another question to Patrício.

What would be a scenario once the China reopens to the United States, and then it imports poultry again from the United States?

What sort of challenge would that represent to you?

And what sort of opportunities would that represent to other markets, maybe China would absorb a higher volume?

So these are my 2 questions.

Lucas, as to In Natura markets, I guess, I had answered in the previous questions, we see room to market price recovery and that should grow.

We are really sticking to our yield strategy.

So we might have compatible prices to our policies.

So now let's talk about the processed products.

I guess that the price level, I mean the rebalance -- the price rebalance that we did back in the beginning of the year, that was concluded back then.

And now what we are measuring is the followship of our competitors, which slowly is getting closer to our levels.

We still have a followship gap in relation to the competition, but we hold to our policy.

And considering competitors' price increase, we have increase in volume of our products in the Brazilian market.

We see possibility of new actions according to the market behavior.

We had a certain stability in the previous season, allowing stable costs.

Now looking ahead, we see -- we foresee a new perspective, a different scenario, which will be related to higher costs due to inflation, going back to normal price policies.

What we did at the beginning of the year was just a correction of what was ending.

And due to this stabilized chain, we had squeezed the margins.

But thanks to a new regulated process, we go back to a market dynamic where we have competitors where we have grain pressures and external market demand.

And with that analysis in mind, we may reach the conclusion, if it will be necessary to have a new price increases.

But so far, what we have in terms of prices is within our politics -- our policies, I mean.

And that's exactly what we did.

And what we said in the beginning of the year, this is the line to follow, and we will keep with this normal prices and cost policies.

What would happen if China opens poultry to the United States?

Well, I don't see that as a main problem.

That will depend on how much is that -- on how that will be done, if that will be done gradually or not.

The United States just import -- exports everything throughout brokers in Africa, in some eastern countries and other countries in Russia or around.

If China opens, there would be a volume reallocation.

They do not have too much wings and/or breast, and China has a higher demand for this food than what we are able to export.

I don't see that as a long-run problem.

All the country that would help our strategy to sell the mix where we sell different parts of the animal.

And sometimes, we find it difficult to sell like legs when we have Japan access.

And an example to illustrate it is the Canadian one.

The Canada was closer to China, and they end up dealing with Japan that increased their frozen food inventory, impact in poultry in exports, legs and wings exports.

To have open and stable markets is important to allow us to better prepare ourselves of market volatility.

Those markets which open and close, that is an obstacle.

But swines, they are suffering, they suffered a little bit in the beginning of November, but now prices are more stable.

Poultry, protein, they have lower prices, but there is market for everything.

I don't see that as any problem.

Thank you.

Our next question is from Luca Cipiccia from Goldman Sachs.

I also would like to go back and talk about the Brazil market, Lorival.

You -- we had 2 quarters with a gross margin of 25%, much healthier than what we had in the past 2 years.

Despite that, it's interesting to say that the Brazil margin and national market's margins, they were above in the first quarter in terms of Brazil profitability, letting aside the short run volatility.

There was a premium for gross profitability margins due to the Brazilian mix, market share, distribution, et cetera, et cetera.

And I have the feeling that still, Brazil market is below of what it could be a high 20s of gross margin, which I believe it should be much more achievable in a scenario where we have a healthy international markets with a good demand.

I'd like to hear from you, if you still have that percent, the domestic profitability?

Margin could keep growing.

There would be a spike, maybe not on a short run, but maybe on mid run.

And if there is that financial urgency by international markets, which can be not considered, at what extent will the company focus to innovation into the domestic market with a focus in product mix or at least, talk about some of those issues that would not taken has been a priority as part of the financial debates that we had in the past 1.5 years.

Thank you, Luca, for your comments.

First of all, about Brazil, within a context of a general margin, yes, there is room for improvement.

Let's not forget, though, that historically speaking, and if we go back in the past, the process products mix and In Natura, they would reach 80% to 85% of process products and 20% to 25% of In Natura.

Today we have 30% of In Natura with lower margins and 70% of processed products.

That may improve from 2 different perspectives.

First 2020, if we see an economic growth, a revenue increase that will take more to the processed products side, allowing better margins.

And that may also improve under a second perspective once international demand -- when China, we are embarking poultry to China with reasonable prices.

I mean the higher the demand, the higher the external demand, the greater will be the local In Natura price.

Having said that, yes, there is a chance for Brazil market improvement always, and let's not just limit such an improvement to external prices, but to everything that has been done in Brazil.

And we will talk a little bit more about that next BRF Day on Tuesday about commercial improvements, distribution, customer service, efficiency and operational cost efficiencies.

These are all frameworks that once we add to a market movement allows us to feel more confident to reach a new level with a positive perspective about that.

And now going to your second question, that allows us to feel more confident, to feel that there is a robust investment and business.

We have invested more in the Saudi Arabia, and we also have to invest more in other markets like the Brazilian market, that is a priority.

We are deploying more resources and investments throughout different initiatives searching -- always searching to go back to what we had in the past, to be pioneers in releasing new products, new categories of products and to have a relevant position in the market, always after greater margins and products participations for processed products and a better balance for our outcomes.

Very good.

I have a quick question still along these lines.

Could you elaborate or clarify your brand strategy between Sadia and Perdig?o?

It's been a while that we saw that exchange.

What can you tell us?

What can you share?

And how do you see that brand development?

At what expense is that part of a, there is a new setting or structure?

It's quite a while that we do not talk about those 2 main brands and its different segments.

Okay.

Luca, this is what we have done, we want to improve our brands.

In a nutshell in BRF, we can explain this in detail.

But well, in the nutshell, the brand territories, Sadia, for example, is the brand that presents more quality, more practicality and driving more and more because it's an innovative brand.

Now on the other is Perdig?o has a very important role because it has an important flavor.

We work with indulgence.

And we also work with special moments and occasions where people are sitting at the table, and we have people at the table that are connected to this brand.

Of course, Qualy.

Qualy, that is the brand that we're working with in our spread markets.

So I believe that these 2 territories are our focus.

And if you analyze our campaigns, you will see this present.

And we also work a lot with the attributes of Sadia like real pizza, lasagna without preservatives.

And it is a brand that talks to this consumer.

And this is a consumer that wants superior quality in his food, wants innovation and practicality.

And on the other side, you see this in our campaigns.

Here you have a campaign, the barbecue campaign, where you can see people eating at the table eating a bean casserole.

So we work with 2 brands that were very close, but now they are fitted into clear territories, and I believe that the value proposal of the consumer is different for each one of these moments.

Our next question comes from Luciana de Carvalho, Bank of Brazil.

My question is regarding the halal market, we've seen that the volumes have dropped, and there have been lower prices.

And we have seen the effort of the companies to control costs and expenses that allowed you to sustain your margin.

I would like to know how much more can you do in this aspect?

Perhaps, we can see that this low double-digit, this new level of margin for the region or can we expect a progress in the short and midterm?

Okay.

Thank you very much.

When we analyze the halal margins.

Halal is present in 2 major regions: Turkey, that represents 40% of the total amount; and the Gulf region, where we have Saudi Arabia, and this represents 60%.

The problem here was very specific in Turkey because of exports.

All the Turkish market exports, 30% of the production that goes toward Iraq.

Now Iraq that was closed, and this is the country that consumes a lot, Baghdad and Lavasa, only Kurdistan was open, and this is in the northern region.

And this is why we had to sell the volume because we have our products scheduled.

We scheduled this 6 months in advance when we -- so we have to sell great part of this volume to Turkey, and this impacted a lot of the prices.

The Turkish market was giving us the best results of the halal product.

And at the end of the line, it represented the lowest result in the quarter.

But when you see the Gulf region that is pressured by consumer, there is an increase of costs like fuels were at a high price level.

We are above our budget.

And we are able to -- we believe that the volumes -- we are placing our volumes with no problems.

There are certain markets like Egypt and Yemen that delay prices from -- delay payments from 1 month to the other, but the impact was merely in the Turkish exports.

And this is where -- but to sell this volume within this -- within Turkey impacts.

Now if you see the total EBITDA regarding the percentage, I believe we're at the same level.

This is more or less 17%.

This is a high level.

The only thing that there is pressure here because once again China is not taking these volumes.

Africa still presents problems of currencies in some markets like, for example, Angola, that's undergoing certain changes in their import format.

And I believe that because of all of this, we have to place greater volumes.

All the industry has to place more volumes in the Middle East.

But in reality, I am very reassured that the prices that we have today.

Now the cost of distribution, the mix of products and the location for channels, well, I believe that all of this is very positive.

And I see the same situation for the next year.

And I believe it will even improve because there are producers that are going from grillers to heavier poultry, and we have new markets that are opening.

Just a second question.

In the region, if you could elaborate regarding your expectation for Saudi Arabia.

Do you believe that there will be an increase of -- an increase after the government visited this country?

Perhaps they will open their country or do you believe that your growth in the region will be because of the new partnerships, as you announced with Sadia?

Well, Saudi Arabia has a clear target.

They want their local production to be 60%.

Well, last year, when they closed many companies of Brazil, they only -- they almost reached 60% during a couple of months.

And this year, it's 50%, yes.

Yes, I believe that our President's visit was very important to show our commitment with these countries.

This was a very intense visit to these countries and also for the governments to see Brazil as an additional partner and that helps them with their security, food security targets.

Ukrania isn't exporting to Saudi Arabia.

So there we can see improvements.

We have had excellent conversation with the officials, with the government, but the target is clear.

They want to reach 60% to reinforce their food security.

And this is why we're following these lines.

We have brand, we have distribution.

Only in Saudi Arabia, we have 500 people working us and our distribution is very efficient.

So yes, we are going to be part of the 60%.

Our next question from Leandro Fontanesi, Bradesco BBI.

There are 2 points that I would like to clarify regarding the result.

One would be the adjusted EBITDA.

There are 2 effects that you mentioned, that would be BRL 57 million in legal expenses and BRL 111 million that would come from provisions, and the mobilization expenses that you do not adjust in your adjusted EBITDA.

I would like to know if you believe that these 2 effects will be nonrecurring effects, and that they should also be adjusted.

And my second point regarding your guidance, your reviewed guidance of 2.75, would this represent BRL 1.1 billion during the fourth quarter?

That doesn't suggest that we will have an improvement.

I would like to understand if I'm understanding this correctly, and I would like to know about your expectations for the Christmas season and how this can add on to your EBITDA?

Okay.

This is [Leandro Carlo] speaking.

I will -- okay, I will answer your question and Sidney will talk about celebration.

When we talk about the corporate effects, we decided not to highlight this as nonrecurring item because provision exclusion for civil costs, well, this is part of our business.

You do know that we do have a labor force of over 88,000 workers.

And moreover, you have effects of legal lawsuits and the flow that has been reducing.

But we are investing in the improvement of internal processes in order to avoid new legal losses, but in some regions of the countries, as we're present in many regions, there is a demand effect and the balance has to be ready to respond to this.

And this is something that is part of the business.

Now the expenses with asset demobilization, we are trying to optimize our asset base.

And with this, you can find adjustments that you will have to carry out throughout the way.

I don't consider this is nonrecurrent because perhaps you may have moments where you have an impairment adjustment or the devaluation of an asset, and you have to recognize this.

And the third point that is a provision for the municipality of Lucas do Rio Verde, this is a housing project that we have.

This is a reserve that we have here.

And we didn't see it as nonrecurring because this is a matter that is common to our business.

And as we all also have a different amount of employees in the regions, we consider this intrinsic.

Regarding our guidance, for example, our approach is always geared to reducing our debt.

I would like to highlight the financial discipline.

Our target is between 1.5x, 2x the EBITDA.

Now 2.75x is a reflection of a number of components between exchange rate variation, margin shocks, so really we prefer to show a relevant reduction when we compare it to the 3.15x that we had in the past.

And it's not only to do the -- to make these -- see these numbers backward, forward.

We have to consider here or the FX when we see the net debt.

We have to see that we have more cash generation, but we also have FX within our debt.

Of course, here we have the exchange rate variation that can affect us.

This -- we improved a lot our financial cycle as you have been able to see, but at the end of the year, you always have the effect -- compressive effect on the -- so these combined factors resulted in this guidance.

And we are reassured, and we believe that we will achieve this because the financial discipline that Lorival mentioned.

So Sidney will talk about the celebration products.

Okay.

Thank you very much for the question.

We're really reassured and optimistic with the Christmas products at the end of the year.

I think there is a combo of factors here that make us feel reassured.

Now number one, I believe that, for example, the -- our fund when you have next lower debt from the consumer, I believe that this is transferred to the consumption and short-term consumption.

I believe that this combo of scenario with a more favorable short-term economic possibility gives us a good -- we have the exchange rate.

The exchange rate is above BRL 4. So one of the proteins has greater pressure, that is codfish, that is always present during these festivities.

Perhaps it will be more expensive and combined with cattle because of the scarcity in prices.

Well, I believe that the environment, so I believe that now the consumers will buy more and more poultry.

Now we also have swine and beef.

And last year, because of all about the surplus of the market, swines, I believe, or pork was a very good opportunity for the consumer for the Christmas dinner before the foreign scenario.

I believe that porks have lost momentum.

And this combination, well, it makes poultry the smart choice for Christmas.

And during your Christmas dinner, you have a product that will cost BRL 70, BRL 75, and this is for 6 and 8 people.

And now the other proteins are very distant from this consumer expenses.

So I believe that the scenario leaves us very optimistic for the end of the year.

Our next question is from Mr. Barreto, Ita?

BBA.

Lorival mentioned that cash flow generation was more robust than in the past quarters and that's a fact.

But let me clarify some aspects here to better understand that.

First, as to the nonrecurrent such as ICMS, I understood that there was no cash effect.

Can you confirm?

Second, was there any change with interest of working capital gain, receivables or anything like that?

And third, as to hedge operation, the company has a balanced hedge with a long dollar position of USD 400 million with BRL 125 million cash in the quarter.

Does that make any sense at all?

So we can have a better idea about the interest components during the quarter.

Antonio Carlos, thank you for your questions.

So answering to the effect of PIS and COFINS adjustment as to the ICMS over the PIS and COFINS calculation, please correct himself.

There is no cash flow effect.

So your perception is confirmed.

Interest rates, we have withdrawn operations continuously as well as FIDIC operations.

And as to [HAD] that has a longer effect.

There is no immediate effect in the quarter.

As to the position, which is just a prospective one so far, we had also an adjust about the investment hedge methodology reducing the consumption of derivative with a financial consumption.

Some new opportunities are being assessed and will be available later on to go into details about this calculation, if that is necessary.

Thank you.

I would like to ask a second question to Patrício.

In fact, I would like to clarify something about opening USA to China.

It's always an honor to hear you, but it's not quite clear when we think about the United States opening.

We understand that when we talk to the local industry, you have a very good prices for legs in China, $3,000, the tonne superior higher price than the one we get for breast -- chicken breast.

Once you open to the American markets, you open competition to a -- in a premium market on some components.

And on the other hand, you decrease that participation on less premium markets, and we have the feeling that, that is a negative impact to the company.

But according to Patrício's comments, it seems he believes exactly the opposite.

Well, we are participating at several meetings with the experts who are analyzing the market.

They want to understand more about the [booth spreads], and those of us that monitor prices and so on, we have a higher migration of beef to poultry, especially considering price per kilo.

Therefore, the leg demand is much higher than the one that we were able to produce and export.

And by that, I mean Brazil as a whole.

There is such a high gap of swine proteins in the market that, first of all, I do not see any volume above 20,000 or 30,000 tonnes per month, which is the capacity that the American market could export.

So we have to understand about that plant migration.

But I see that cattle proteins and the issue that we won't be able to pay for pork in the market and then migrate to poultry, well, million tonnes missing and the price difference, even if that is $3,000, that's much lower than what would represent to buy 1 kilo of pork meat in the market.

So we are very optimistic in that sense.

Our next question is from Jo?o Soares from Citibank.

I have 2 questions, 2 follow-ups, actually.

First, it's to Sidney about processed products prices for the fourth quarter, considering that over the second, you said before that you would assess several variables.

So what are the main obstacles for new price increase?

If there are any obstacles, would that be local demand?

Consumers, they still have a pressed wallet or possibly, there is no followship by competition.

Let me just understand what is preventing price increase?

And second question about cash flow.

I would like to understand more about working capital.

Is that sustainable, those 18 days of financial interests?

Can we expect an improvement because you keep mentioning about finished product line?

From a working capital standpoint, what to expect from these measures effectively?

And what to expect for the quarter?

Jo?o, we have here 2 different contexts.

First one, first scenario In Natura.

We believe that with this scenario that Patrício has just mentioned, a greater demand for poultry, considering the scarcity of pork and that migration to poultry, that will take the market to higher levels of price in Brazil.

And consequently, that we will open a window of opportunity to repass.

The fact that, that did not happen before does not mean that it will not happen in the future.

We believe it will.

And considering that equation of export flow, the last quarter was different from our forecast, but we believe that pressure will go on.

This is the In Natura scenario.

As to processed products, we have a different scenario.

We have elasticities, we have competitors, and we have offer and demand.

And in the end, we have an equation that will allow better profitability and higher market share.

There is a market share look or -- and the followship of competition is closer to our movement.

And we, as market leaders, we understand that we had our first initiative to price positioning, but that fellowship is taking place.

Therefore, there is an equation versus the competition followship versus the margins that we designed in our strategic plan.

So that is an equation between market share and profitability designs for Brazil market is part of our budget.

This is a broader calculation.

Any time that we say that Brazil will export more raw material, that is correlated to that, that allows price opportunity and also opportunities to build up a portfolio with our products, which are left.

This is a market analysis that we have to be very careful about, objective margins and market share equation versus export costs.

Okay.

Jo?o, let me just add to Lorival's comments.

A quick follow-up, please.

Now you may talk, Jo?o.

Go ahead.

Talking about Christmas products, but maybe you should conclude your reasoning.

Yes, just adding fast, we have to highlight the BRF integration level and to process food industry, that is key.

So once you have pro order protein prices, especially the beef price increasing, there is a migration to our proteins, definitely.

And in addition to that, our possibility to capture that considering that our integration levels of 100% for poultry and over 90% for swine.

So that represents a differential and an opportunity that BRF has to generate and work well in that market.

Would you like to add anything?

No, no, no.

No, that's very clear now, Lorival.

We're talking with smaller players, it seems that there was a balance in the past year where smaller players, they reduced their volume of categories for Christmas products.

And it seems now that the market is much more adjusted where big players, they are well positioned in terms of Christmas market share products.

Do you see a greater occupancy in relation to the past 2 years, maybe that will help with that price calculation.

This is a short-run operation, right, so I may -- I guess that by the end of the year, we can give you a clear statement or explanation.

Last year, we grew in market share, thanks to a combination of factors, poultry and pork.

However, this year's scenario is totally different than last year's.

We are rather pressure or over the chain, considering the raw material left in Brazil.

And all players in the market, they operate still working with raw material left.

But this year, we have a totally different market.

We have exchange -- currency exchange pressures.

We have swine scarcity.

We have a price repositioning for beef, poultry and swine is taking that to a level of much higher prices in comparison to last year.

But conversely, we have a positive aspect, which is guarantee funds, short-run investment injection.

And we believe that the poultry market will grow.

There will be a spike, considering that reasonable growth in this category, 1 to 2 percentage points.

This is a soft and mild growth, but poultry in composition, swine, beef cattle and poultry, poultry will grow more than beef and swine.

So for those of us who have a higher concentration in poultry, we have to be optimistic as we hope to get a year with results and volume higher than the one we got last year.

Jo?o, just to close to your second question about the financial cycle and investments, the balance has to work on behalf of the company.

And we have different cycles, a long and complex chain, but we had reached that level of a net financial cycle.

But you may need to raise inventories, considering the grain cycles or also the client-based behavior.

And for that, you have to allow different offers.

And talking about consumers' relationship and purchase success where we have to get the best business and financial negotiation to the company.

Therefore, today, we have 18 days in average for liquid time for net time, and we have to ensure that leading to cash flow as well as administration of the working capital in a very efficient way to the company.

So I believe that in the next quarters, we'll be around 18 to 22 days max.

But I believe that we are in the proper level.

Our next question from Henrique Brustolin, BTG Pactual.

I would like to go back to Saudi Arabia and to talk about your new plant.

Lorival, you mentioned there is nothing defined regarding raw material, that this would be exported from Brazil if you would buy local raw material as you have a part of local purchases.

I would like to know how you see the margin of this new plant.

And also just to clarify, if there is something to be -- is going to be defined?

And the second question regarding the region, if you could tell us how you see the supply and demand with this plant together with Abu Dhabi.

Thank you, Henrique.

Now talking about sourcing of our new plant, nothing has been defined yet because this will all depend on the products that we make.

And many times, it's not even a matter of price.

It would be the competitiveness between their market and the Brazilian markets there.

They only produce the griller that is the small poultry.

If you need to marinate the breast, well, mandatorily, you're going to have to import the breast from Brazil because of the size of it.

So it's not even a matter of competitiveness of price, but yes, it would be the adequation.

Well, we need the right products so that we have the proper product at the end to guarantee our quality.

And this is something that we are going to pay attention to.

And I will give the floor to Patrício, and he will talk about how the Kizad plant will work, when it will be ready, and he will talk about the market dynamics.

Okay.

And also to -- I would like to strengthen that today that our Abu Dhabi plant buys from the 2 or 3 main producers of Saudi Arabia.

We developed this together with them because you have to remember that you cannot package the entire chicken, and Saudi Arabia is the market that has greater penetration of whole poultry because women weren't in this market in the past and this has changed.

So when you cut the poultry because you have dislocated leg or wing, this was a problem for the producers.

So it ends up being a problem because they cannot sell the entire poultry.

There are local raw materials that are cheaper than what we import from Brazil, and we have developed good quality with these local producers.

Today, we already buy from them.

And as Lorival said, we -- now if you need something of a bigger size, and you need a chicken of over 2.5 kilograms, and I believe that the local market cannot produce this type of poultry, and they won't able to -- they won't be able to produce these poultries in the midterm.

Now regarding the 2 plants.

Today, with the Kizad plant that is in Abu Dhabi, well, in a certain way, we haven't able to higher many food service customers.

One, because there are less flexibilities in terms our lines.

Our lines are very robust for the market.

And number two is because we ended up producing for our brands, Sadia.

Now this would be for the retail market.

So to have a plant in Saudi Arabia was one of the needs that we had analyzed in the past 2 years that would be to have a more flexible plant in order to reach more channels, especially in the food service because this is something that they need more and more enough.

And number two, we -- what I always say is about consumer-driven, for consumer driver, it would be to develop more categories, and we are seeing a very interesting opportunity in Saudi Arabia.

You see more women in the labor market.

You see more women outside of their households, and they need more convenient products.

And today, you do not have the supply locally.

So yes, we do -- well, I believe that the scenario is making our life easier, and I believe that both plants will be able to complement themselves.

So this is more or less the scenario for 2 plants and for raw material.

So our Q&A session has come to an end.

I would like to give the floor to Mr. Lorival Luz.

So thank you very much to everyone.

Thank you very much for posing your questions.

I would like to thank the entire team of BRF.

I would like to strengthen once again our trust in the results that were presented, and how we trust all the effort.

And I believe that this makes our result very consistent.

And I would like to draw your attention to the future prospects when we see not only impact of the international market, but also everything that has been done in Brazil.

And I believe that reassures us and we will be able to advance and advance our trajectory of financial discipline, lowering our leverage and to see prospects of growth and to recover the investments according to what was recently announced.

So I would like to thank everyone, and I would like to wish a good end of the year to everyone.

Thank you very much.

BRF's earnings result has come to an end.

I would like to thank the participation of everyone, and have a very good day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]